How to prepare your company for heightened geopolitical risks
The election of Donald Trump as the 47th president of the United States signals an end to the relatively calm geopolitical climate experienced since the end of the Cold War. Considering Trump’s previous term as President, and his renewed focus on tariffs to achieve strategic goals, international commerce and geopolitical stability are likely to suffer in the coming years.
As protectionism rises, Pax Americana wanes: geopolitical risk is at its highest level in decades. The International Monetary Fund has warned that persistent geopolitical tension combined with protectionist trade policies and rising social tensions present a risk to the global economic outlook.
With challenges and uncertainty around the globe ranging from tariffs to armed conflict, it has never been more important for companies to understand and proactively manage their exposure to geopolitical risk. This is particularly true for companies with a presence in the Asia–Pacific, a region home to current and potential geopolitical flashpoints.
The right people with the right tools
Companies in the Asia–Pacific need more tools in their geopolitical toolbox and the right people to operate them. Solutions must be tailor-made: management must consider the political and the corporate elements of risk, build their in-house capabilities and ensure the knowledge and expertise are spread across the whole enterprise. Each organization’s solutions require their own unique blend of these elements.
To deeply assess the corporate dimension of geopolitical exposure, a team needs excellent financial and operational expertise, consensus-building abilities, risk management skills and the ability to quantify impact.
Corporate risk may be easier to source, or already found in-house, with CFOs, General Counsels and strategy leaders typically well-versed in anticipating and planning for challenges.
In addition to these internal capabilities, the political dimensions of risk are typically best understood by people with a background in regulation, intelligence and diplomacy or the military. Corporate risk may be easier to source, or already found in-house, with CFOs, General Counsels and strategy leaders typically well-versed in anticipating and planning for challenges.
Once the right team is installed, CEOs also need to consider if their (new) teams have the tools they require to adequately assess risk. A recent EY survey of global CEOs found that only 25 percent of Asia–Pacific CEOs believe they have full visibility into their political risk, suggesting that their teams may not have the necessary tools to understand their risk environment.
These tools can range from purchased datasets to investment analyses that factor geopolitical risk into the cost of capital equation and cash flow models. Scenario analyses and planning are additional and also essential tools, and companies should be identifying signposts – or pre-specified changes in the geopolitical landscape – that indicate which scenarios are becoming more likely and developing action plans for each.
A recent EY survey of global CEOs found that only 25 percent of Asia–Pacific CEOs believe they have full visibility into their political risk, suggesting that their teams may not have the necessary tools to understand their risk environment.
This could include enhancing supply chain resilience by developing alternative sources and routes for critical materials. These plans need to include all relevant departments in an organization: security, operations, strategy, communications, legal and others.
The more established functions a company has in place, the more challenging it becomes to organize a coherent and agile structure to address geopolitical risks with a cross-functional approach.
Just as sustainability has become a core component of corporate strategy, mitigating geopolitical risks requires a comprehensive, whole-of-business approach, bringing together expertise from areas such as strategy, legal, risk management, government affairs and more.
It is not enough to have a dedicated team; the entire company must be engaged in understanding and addressing these risks.
A time for introspection
Just as in an individual’s life, a profound external shock triggers self-reexamination, so too in corporate life. Management’s decisions must be deeply informed by a company’s culture, values and principles: a compass to guide you when geopolitical tensions force you to exit or double down on a certain market, for example.
To effectively navigate the complexities of the present, a company must have a clear understanding of its historical context and a keen sense of its identity and mission. This reflection determines how decisions are made in response to geopolitical challenges.
Just as in an individual’s life, a profound external shock triggers self-reexamination, so too in corporate life.
In our complex world there are no perfect answers: management must juggle the interests of multiple stakeholders – shareholders, employees, communities, customers and suppliers around the world – while staying as true as possible to their core values. Whatever path a company may choose, management must hold themselves accountable while maintaining transparency in communication, internally and externally.
The big open question is around decoupling geographic portfolios. Just as the incoming United States administration wants a strategic decoupling from China, one school of thought is to self-contain operations in certain markets by intentionally separating operating infrastructure from the rest. The scope spans from hard infrastructure, such as legal structure and information systems, to soft infrastructure, such as talent rotation.
In today’s geopolitical environment, the temptation for decoupling is great – by making these markets self-contained, there is less risk of being entangled in geopolitically motivated government interventions. And it can make potential exits easier.
To effectively navigate the complexities of the present, a company must have a clear understanding of its historical context and a keen sense of its identity and mission.
On the other hand, decoupling flies in the face of the virtue of globalization: the economies of scale. Having one enterprise resource planning system for worldwide operations, for example, allows simultaneous upgrades and lowers maintenance costs in aggregate. And there are also intangible merits of being multinational, like being able to nurture high-potential talent through unconstrained global mobility.
Depending on the company’s geographic portfolio, values and perspectives, it will have to decide where they fall on the spectrum: from a free and flat world to an extremely blocked one.
In short, organizations that pursue decoupling will have to grapple with the Zen question: how can you be separate yet connected, like an island connected beneath water? Again, as with developing organizational solutions to address geopolitical agendas, there is no one-size-fits-all answer.
A learning curve
As geopolitical risks continue to shape the global business landscape, companies in the Asia–Pacific must pursue a proactive and integrated approach to risk management. As we embark on the uncharted territory of great geopolitical uncertainties in the post-Cold War era, the journey will inevitably be one of introspection and occasional mistakes.
Some organizations will be able to adapt to geopolitical disruptions, but many others will fail because they cannot.
The more robust your company’s core values are – and the more it relies on them for crucial decision-making – the better the chances are that you will successfully navigate the storm. In addition, investing in advanced tools and scenario planning, fostering cross-functional collaboration and learning from industries with longstanding geopolitical challenges will be critical.
For all the thought and planning that can be done, an element of unpredictability will always remain. By bridging the gap between awareness and action as much as they can, CEOs can ensure their organizations not only successfully manage risk but also seize opportunities for growth.